On Importing More Electricity from Québec ...

September 2014

• Some believe that Ontario could tap into cheap imports from Québec to offset our substantially more expensive electricity. In reality, this is a complex technical and economic decision that would not reduce power rates in Ontario for many years to come.
• With the two provinces having somewhat complementary electricity load profiles, the current market-based imports and exports between the two are working as intended: each province has the ability to purchase electricity from the other province when market conditions are favourable to do so.
• There may be some point beyond 2018, when Ontario would need to procure additional resources to meet its adequacy target. If Québec could offer firm imports into Ontario when there is a need - at a cost cheaper than other available options - then a case could be made for firm imports.

The idea of importing more "cheap, clean, reliable” power from Québec seems like a great deal. In reality, this is a complex technical and economic decision that would not reduce power rates in Ontario for many years to come.

Québec has invested immensely in hydroelectric megaprojects, which today provide the province with over 35,000 MW of power. These legacy projects provide the Québécois with relatively cheap electricity. Industrial customers in Montréal pay just over 5 cents/kWh, while residential customers pay just over seven. Some believe that Ontario could tap into cheap imports from Québec to offset our substantially more expensive electricity.

Over the last decade Ontario has built over 10,000 MW of new capacity, most of which is purchased by the Ontario Power Authority (OPA) through long term fixed price contracts. Natural gas plants typically have capacity-based contracts, guaranteeing them monthly capacity payments. Renewable and nuclear facilities typically have energy-based contracts, guaranteeing above market rates per unit of energy produced. Both types of contracts usually have 20-year terms, and breaking them is costly.

While a majority of Ontarians heat their homes with natural gas, Québécois typically heat homes with electricity. The result is a somewhat complementary relationship between the provinces’ electricity load profiles. Although both provinces use more electrical energy in the winter, Québec’s electricity demand peaks in the winter, while in recent years Ontario’s demand has peaked in the summer. With offsetting peak demands, it would seem natural that the provinces should sell each other electricity for mutual benefit.

This is exactly what happens today. When the Hourly Ontario Energy Price (HOEP) is above Québec’s marginal cost of electricity production, marketers will sell Québec electricity into the Ontario market. Ontario exports energy into Québec when Québec requires imported electricity, or when Ontario is producing surplus electricity. In January 2014 when the HOEP increased dramatically and Québec did not have enough resources to meet domestic demand, exports from Ontario to Québec increased. In previous summers when HOEP increased relative to adjacent months, Ontario increased imports from Québec. Both provinces are over-supplied during the spring freshet and dump electricity into neighbouring markets.

Market-based imports and exports are working as intended: each province has the ability to purchase electricity from the other province when market conditions are favourable to do so.

The Ontario Clean Air Alliance suggests that Québec could sell electricity to Ontario for 5.7 cents/kWh. Hydro Québec Energy Marketing (HQEM) has never endorsed this figure. Wholesale electricity contracts in New England far exceed this price. The City of Cornwall, who receives its electricity from Québec, pays a higher commodity cost than other Ontario consumers. HQEM wheels power through Ontario to more lucrative markets such as New York City.

Imports from Québec offset energy purchased at the HOEP and would not reduce the burden from the fixed price contracts driving Ontario’s increasing electricity rates. Given the July 2014 weighted average HOEP of 2.37 cents/kWh, purchasing electricity at 5.7 cents/kWh appears to be a bad deal for Ontario. Ontario would be hedging a portion of their electricity purchases at a substantially higher cost than domestic supply.

In a May 2014 letter to the Independent Electricity System Operator (IESO), HQEM positions imports from Québec as a capacity resource. Similar to the way Ontario contracts natural gas-fired power plants, Ontario would be purchasing a capacity product. Purchasing this now would be adding additional fixed costs to the Ontario ratebase during a period of oversupply.

According to the Long Term Energy Plan, Ontario has more than enough resources to meet adequacy requirements until at least 2018. Québec struggles to meet its winter demand. During the unusually cold 2013-14 winter, peak consumption in the province exceeded 39,000 MW – 3,000 MW higher than their installed capacity – and Québec relied on imports from Ontario and other jurisdictions to keep homes warm. Hydro Québec’s Plan D’Approvisonnement forecasts an additional 2,150 MW of capacity needed to meet resource adequacy requirements by 2020. About 1,100 MW of this are planned imports into Québec.

There may be some point in the future, beyond 2018, when Ontario would need to procure additional resources to meet its adequacy target. If Québec could offer firm imports into Ontario when there is a need - at a cost cheaper than other available options, such as a simple cycle gas turbine or the conversion of southwestern Ontario’s retired coal plants (Nanticoke and Lambton) to natural gas - then a case could be made for firm imports.

Since Québec does not have enough power to meet their winter peak, the OPA and IESO would need to ensure that there would be enough firm imports available during the winter when Ontario consumes more electrical energy. This seems unlikely unless Québec builds another megaproject. The last time Québec attempted to build a megaproject to provide another jurisdiction with "cheap, clean, reliable” power; the project was cancelled and never built.

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